Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
99 views

1 - Tutorial Exercises

This document contains 10 practice problems related to finance principles including time value of money, compound interest, present and future value, interest rates, and real rates of return. The problems cover calculating future and present value with different interest rates and compounding periods, defining and calculating annual percentage rates, effective annual rates, and real rates of return. The goal is to help students practice key time value of money and interest rate calculations.

Uploaded by

ahmed
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
99 views

1 - Tutorial Exercises

This document contains 10 practice problems related to finance principles including time value of money, compound interest, present and future value, interest rates, and real rates of return. The problems cover calculating future and present value with different interest rates and compounding periods, defining and calculating annual percentage rates, effective annual rates, and real rates of return. The goal is to help students practice key time value of money and interest rate calculations.

Uploaded by

ahmed
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

MGFB10H3 Principles of Finance

Tutorial 1
Exercises
Future value (FV) of a cash flow
1. (5.2 in the textbook ) Compute the future value of $1,000 compounded annually for (i)
10 years at 5 percent, (ii) 10 years at 10 percent, (iii) 20 years at 5 percent. Why is
the interest earned in part (iii) not twice the amount earned in part (i)?
Simple vs compound interest
2. (5.1 in the textbook ) First City Bank pays 8% simple interest on its savings account
balances, whereas Second City Bank pays 8% interest compounded annually. If you
made a $5,000 deposit in each bank, how much more money would you earn from your
Second City Bank account at the end of 10 years?
Present value (PV) of a cash flow
3. (5.7 in the textbook ) Imprudential Inc. has an unfunded pension liability of $750 million
that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts
want to discount this liability back to the present. If the relevant discount rate is 8.2
percent, what is the PV of this liability?
Basic time value of money relation: finding T, r
4. (5.6 in the textbook ) At 8 percent interest, how long does it take to double your money?
To quadruple it?
5. (5.8 in the textbook ) Although appealing to more refined tastes, art as a collectible has
not always performed so profitably. During 2010, Deutscher-Menzies sold Arkie under
the Shower a painting by a renowned Australian painter Brett Whiteley, at auction for
a price of $1,100,000. Unfortunately for the previous owner, he had purchased it three
years earlier at a price $1,680,000. What is his annual rate of return on this painting?
Compounding frequency
6. (5.21 in the textbook ) What is the future value in six years of $1,000 invested in an
account with a stated annual interest rate of 9 percent,
(a) Compounded annually?
(b) Compounded semiannually?
(c) Compounded monthly?
(d) Compounded continuously?
Why does the future value increase as the compounding period shortens?
Interest rates: APR vs. EAR

7. A payday loan (also called a payday advance, salary loan, payroll loan, short term, or
cash advance loan) is a small, short-term unsecured loan. These loans tend to have
high interest rates and short repayment periods, which means frequent compounding.
Ontario enacted the Payday Loans Act, 2008 to limit the fees charged on loans in
Ontario to $21 per $100 borrowed for a period of two weeks.

(a) If the lender charges exactly the limit fee, what is the APR (the stated rate) the
he/she needs to disclose for such a loan? What is the EAR?
(b) Effective January 1, 2018, Ontario has reduced to maximum rate for payday loans
down to $15 per $100 loaned. What is the EAR for such loan?

Interest rates: effective rate for any period

8. You want to save for a special vacation that you will take in six years. Given a rate of
6% per year with monthly compounding for your savings account at CIBC, you wish
to know what will be the future value of an annuity of deposits you will make to your
account. This information (together with annuity formulas we will learn in Lecture 2)
will help you decide the best way to save. You are considering the following payment
schemes over a six year time frame. Compute effective rate per period corresponding
to the cashflows for each of the cases.

(a) Monthly deposits.


(b) Semiannual deposits.
(c) Annual deposits.
(d) Bi-annual deposits (every two years).

Interest rates: real vs. nominal

9. In 2000, short-term interest rates in Canada were about 5.8% and the rate of inflation
was about 3%. In 2003, interest rates where about 2.7% and inflation was about 3.1%.
What was the real interest rate in 2000 and 2003?

Interest rates: before-tax vs. after-tax

10. Suppose you have a credit card with 19.9% APR with daily compounding, a bank
savings account paying 5% EAR, and a car loan with a 4.8% APR with monthly
compounding. Your income tax rate is 40%. The interest on the savings account is
taxable, and the interest on the credit card and on the car loan is not tax-deductible.
What is the effective after-tax interest rate of each instrument, expressed as an EAR?
What should your priorities be in terms of your financial situation?

You might also like